Bitwise: Why Bitcoin Spot ETF Option Approval Could Trigger Price Surge

This Friday, the U.S. SEC approved the listing of options for the BlackRock iShares Bitcoin ETF (IBIT) on Nasdaq. The trading platform will treat Bitcoin ETF options similarly to other ETF options, following the same rules and trading procedures.

Bitwise's Head of Alpha Strategies, Jeff Park, posted a lengthy article on social media highly appreciating this approval, stating that "this move marks one of the most significant advancements the cryptocurrency market could achieve." He believes that some unique properties of Bitcoin, coupled with the rules of the regulated options market, will lead to an explosive price increase. The full article compiled by BlockBeats is as follows:

With the U.S. Securities and Exchange Commission approving the listing and trading of Bitcoin ETF options today, I believe we are about to witness the most extraordinary surge in "volatility" in financial history. I feel this deserves a more comprehensive explanation, so I would like to emphasize some key points about Bitcoin, the nature of the regulated options market, and the powerful combination of the two. It is no exaggeration to say that this marks one of the most significant advancements the cryptocurrency market could achieve.

A historic first. Bitcoin’s nominal value will be "partially deposited in the bank" through ETF options. How can we explain this? While Bitcoin's non-custodial nature and capped supply are its greatest strengths, they are also a hindrance, limiting its ability to create synthetic leverage. Although Deribit has made efforts, it has never fully addressed the issues of counterparty and capital efficiency in achieving widespread adoption. And CME futures options require too much active management. Now, Bitcoin will have its first regulated market, with the OCC protecting clearing members from counterparty risk. This means Bitcoin's synthetic nominal exposure can grow exponentially without introducing a CTD risk that would deter investors. In a liquidity-driven world, leveraging to unlock synthetic flow represents the biggest opportunity for Bitcoin ETFs, enhancing their financial utility compared to the spot market.

Furthermore, Bitcoin can now, for the first time, incorporate term structure as part of the leverage calculation. Retail traders have already embraced perpetual options for leveraged trading, but these tools are imperfect, more akin to a series of daily 0DTE options that need constant rolling. With Bitcoin spot ETF options, investors can now engage in term-based portfolio allocations for their bets, especially for the long term. Holding long-term OTM call options as premium expenditure is likely to bring more returns to investors than fully collateralized positions. Bitcoin is often compared to call options due to the decay of their premium, occasionally experiencing explosive surges. Now, investors can bet on "volatility surge" with the same or lower premium, gaining more delta over a longer time frame—an extremely attractive opportunity.

Bitcoin also has a unique volatility characteristic, with one of the most important features being the "volatility smile." Most stocks/indices exhibit "volatility skew," where upside volatility is cheaper than downside volatility (i.e., protection is more expensive than speculation). What sets Bitcoin apart is that both upside and downside moves are equally frequent, leading to the market demanding a risk premium from both sides. Historically, for call options, as the spot price rises, the implied volatility tends to decrease. Therefore, even though the option delta increases (becoming more ITM), the growth rate slows down - this is positive vanna (dA/dvol), creating some resistance. However, Bitcoin options have negative vanna: as the spot price rises, volatility also increases, meaning delta increases faster. When traders short gamma hedge this (gamma squeezes), the Bitcoin scenario becomes explosively recursive. More upside leads to more upside potential as traders are forced to keep buying at higher prices. Negative Vanna Gamma squeeze is like a rocket.

BlockBeats Note: The option smile, also known as the volatility smile, describes the curve that represents the relationship between implied volatility and the strike price of an option. It is called a "volatility smile" because out of the money and in the money options have higher volatility than at the money options, causing the volatility curve to show a upward-curved smile shape, with volatility being higher on the two extremes and lower in the middle, resembling a smile, hence the name smile option.

The most critical factor tying all of this together is: Bitcoin itself cannot be diluted to accommodate this newfound leverage. Compare this to stocks like GME or AMC. Management can issue new shares to take advantage of pricing anomalies and limit price increases. Bitcoin can never do this. Readers may ask, "But what about commodities like oil or natural gas? Can't they be analogized? If so, why is Bitcoin different?" The key difference is that most physical commodities have expiration dates, meaning they tend to trade in the futures market rather than the spot market. Unlike the spot market, futures markets’ total and nominal exposures vary based on expiration dates and the net interest of physical versus fiat, hence they do not allow directional participation (i.e., people engaging in both long and short positions on the curve, as well as physical versus fiat trading). Additionally, these markets are subject to supply manipulations by organizations like OPEC.

In short, the Bitcoin ETF options market is the financial world's first regulated leverage on a truly scarce perpetual commodity. Things could get wild. In such a scenario, the regulated market may shut down.

But Bitcoin's extraordinary aspect is that there will always be a parallel, unclosable, decentralized market, unlike GME.

This will be unbelievably beautiful.